For the week, the Dow is down 0.8%, the S&P is flat and the Nasdaq is up
0.4% in its second straight weekly rise.

In economic news,
durable goods orders were up 1.4% in June, but May’s numbers were revised lower
to show a 1.2% decline. Shipments of core capital goods fell 1%. Core capital
goods shipments are used to calculate equipment spending in the government's
gross domestic product measurement. The government will release its first
snapshot of second-quarter GDP next Wednesday. The economy contracted at a 2.9%
rate in the first three months of the year, with business spending on equipment
falling at a 2.8% rate.

Investors have been
selling junk bonds. In the past week, investors pulled $2.3 billion from junk
bond funds. That marked the biggest outflow since June 2013, when the Fed was
hinting about tapering. The high-yield market has pulled back in recent weeks,
sending prices lower and yields higher. The bond market is not as liquid as it
once was; trading volume is down across the board, and trading desks have been
cut back, meaning a big sell-off could look more like a run on bonds.

Yesterday we told you
about Amazon.com’s earnings report, or more specifically, a lack of earnings.
Amazon has a unique business model where they manage to consistently increase
sales without actually turning a profit. If it seems like this kind of model
has limitations, you are correct, and today Amazon hit the wall. Yesterday’s
non-earnings report went from bad to worse as Amazon announced the current
quarter will result in bigger losses than the last quarter. The $126 million
dollar loss will swell to a $400 million dollar loss, maybe as much as $800
million.

Breaking down the
forward guidance, about $410 million of the current quarter loss will be in the
form of stock compensation. What makes this even more interesting is that the
company lost about $14 billion in market cap today. Jeff Bezos lost $3.5
billion from his personal fortune; Bezos may be an internet visionary, but
lacks some basic math skills.

Also yesterday, Visa
reported net income for the quarter ended June 30 rose 11 percent to $1.36
billion, or $2.17 a share, from $1.23 billion, or $1.88, a year earlier.
Analysts had expected $2.10 a share. Visa’s losses accounted for about
one-third of the decline in the Dow today. So, the earnings side was good but
the company reduced its revenue forecast for the rest of the fiscal year. One
reason for the reduction – Russia. After the US imposed sanctions on Russia,
Putin recommended Russia create its own payment system. Visa said that tensions
with Russia may affect earnings by “several pennies,” and those headwinds, in
the form of lower cross-border volumes, are likely to continue in the short
term in international corridors such as Ukraine, Venezuela and Argentina.

The European Union has
been holding meetings in Brussels to find agreement over imposing sanctions on
Russia over its behavior in Ukraine. They have decided to put together an
outline on sanctions and get together again next week; the outline would
exclude the crucial gas sector.

Following the downing
of Malaysia Airlines Flight 17, many Europeans are eager for their governments
to do something to punish Putin for fomenting instability in the Ukraine. However,
the debate over economic sanctions is shining an awkward spotlight on the large
and important trade relations between Russia and Europe. Russia is Europe’s gas
station, and if Europe decides to stop doing business with Russia, they will
have to figure out a new and likely more expensive way to put gas in the car
and to heat their homes.

According to the
Energy Information Administration, oil and natural gas accounted for 70% of
Russia’s export revenues in 2012; and most of those exports go to Europe; and
most of Europe has not figured out how to provide their own energy. Oil
reserves in the North Sea are expensive to tap; fracking technology hasn’t
happened for a number of reasons; and so Europe depends on Russia for about 30%
of its natural gas. Many of Europe’s biggest corporations are directly involved
in importing fuel from Russia, and many of Europe’s biggest industries, such as
utilities, power-hungry manufacturers, car manufacturers, transportation
systems, and anyone else who uses electricity – all rely on fuels imported from
Russia.

If the EU were to
suddenly grow a spine and just say no to Russian oil and natural gas, it would
certainly inflict some short- term pain on Russia, but oil and gas are fungible
and the market is global. One of Putin’s first moves was to sign a deal with
China to make Russia a major supplier of natural gas. Europe does not have a
quick replacement for Russia’s natural gas and winters in Europe can get very
cold.

The US does not depend
on Russian fuels; however, there are a couple of strange side stories coming
out of the sanctions. First, is the as-yet-unaddressed need to restart NASA, so
we don’t have to depend on Russia for ride sharing to the space station. The
other, is that Americans don’t really care much about Russia anyway; last week
the US imposed a fresh round of sanctions on Russian companies, including
weapons manufacturers. How did patriotic Americans respond? Well, you can no
longer buy Kalashnikov AK-47s. Technically you can, you just cannot find any.
The move sent American gun buyers into frenzy, seeking to buy any AK-47s on any
store shelf.

It should come as no
surprise that Russia has stepped up its direct involvement in fighting between
the Ukrainian military and separatist insurgents, unleashing artillery attacks
from Russian territory and massing heavy weapons along the border. So, while
the EU considers drafting a new outline of possible sanctions for further
possible consideration; Russia may send in the troops.

About 34% of the
contiguous United States was in at least a moderate drought as of this week.

Things have been
particularly bad in California, where more than 80% of the state is in
“extreme” drought, state officials have approved drastic measures to reduce
water consumption. California farmers, without water from reservoirs in the
Central Valley, are left to choose which of their crops to water. Parts of
Texas, Oklahoma and surrounding states are also suffering from drought
conditions. East of the Mississippi, rainfall has been rising. But global
warming also appears to be causing moisture to evaporate faster in places that
were already dry. Researchers believe drought conditions in these places are
likely to intensify in coming years.

A new study
released yesterday by NASA and the University of California Irvine shows we are
losing water at a shocking rate in the West. Using a satellite designed to
track changes in groundwater, the research team found that the Colorado River
basin—, which supplies water to 40 million people in, seven states—lost 15.6
cubic miles of freshwater in the last 10 years. From December 2004 to November 2013,
the Colorado basin lost nearly 53 million acre feet, or almost double the
volume of the nation’s largest manmade reservoir, Lake Mead. (Actually, Lake
Mead is no longer the biggest reservoir in the country; a lake in North Dakota
takes that honor, as Lake Mead has shrunk.) More than 75% of that loss was due
to excessive groundwater pumping. It is the first study to quantify just how
big a role the overuse of groundwater plays in dwindling water resources out
West.

How did this happen
without anyone noticing it? The answer, basically, is that up until this study,
nobody had a good way of measuring how much water is stored underground. And
the researchers aren’t certain how much groundwater is left. The U.S. Bureau of
Reclamation manages water above ground in the basin’s rivers and lakes, and its
losses are documented. Pumping from underground aquifers is regulated by
individual states and is often not well documented.

In the last seven
years, Lake Mead’s dwindling has accelerated. The lake is now just barely more
than 1,080 feet above sea level, slightly below its previous record low set in
November 2010. Lake Mead is expected to drop another 20 feet into record
territory by summer 2016. The low water level is already affecting
hydroelectric power production. If the water level drops below 1050, the Hoover
Dam might not be able to produce electricity.

Well before then,
perhaps as soon as next April, downstream water rationing will kick in—this has
never happened before. A 2007 shortage-sharing agreement sets three elevations
for which water restrictions will be imposed on the Lower Basin states of
Arizona, California, Nevada, and New Mexico. The first shortage level, 1,075
feet, will likely come into effect in the next several months. It would require
a total water use cut of 4.4%, with Arizona taking an 11% cut, Nevada a 4% cut,
New Mexico 3.3% and California remaining the same.

Right now, Phoenix has
officially recorded just over one inch of precipitation since the start of the
year; the normal amount is just less than 4 inches. The problem is that when
above-ground water supplies run low - which is happening now, and it is common
in California, even when there isn’t a drought - water managers use groundwater
to meet public and farming needs. The study finds that so much groundwater has
been used that it will be impossible to recover it naturally; overall supply of
available freshwater will continue to decrease as a result.

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